SECTION 1. PURPOSE
This revenue procedure updates Rev. Proc. 2003-76, 2003-43 I.R.B. 924, by
providing optional standard mileage rates for employees, self-employed individuals, or
other taxpayers to use in computing the deductible costs of operating an automobile for
business, charitable, medical, or moving expense purposes. This revenue procedure
also provides rules under which the amount of ordinary and necessary expenses of
local travel or transportation away from home that are paid or incurred by an employee
will be deemed substantiated under ' 1.274-5 of the Income Tax Regulations if a payor
(the employer, its agent, or a third party) provides a mileage allowance under a
reimbursement or other expense allowance arrangement to pay for the expenses. Use
of a method of substantiation described in this revenue procedure is not mandatory and
a taxpayer may use actual allowable expenses if the taxpayer maintains adequate
records or other sufficient evidence for proper substantiation.

.02 Determination of standard mileage rates. The business, medical, and moving
standard mileage rates reflected in this revenue procedure are based on an annual
study of the fixed and variable costs of operating an automobile conducted on behalf of
the Internal Revenue Service by an independent contractor, and the charitable standard
mileage rate is provided in ' 170(i) of the Internal Revenue Code.

SECTION 3. BACKGROUND AND CHANGES
.01 Section 162(a) allows a deduction for all the ordinary and necessary
expenses paid or incurred during the taxable year in carrying on any trade or business.
Under that provision, an employee or self-employed individual may deduct the cost of
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operating an automobile to the extent that it is used in a trade or business. However,
under ' 262, no portion of the cost of operating an automobile that is attributable to
personal use is deductible.
.02 Section 274(d) provides, in part, that no deduction is allowed under ' 162
with respect to any listed property (as defined in ' 280F(d)(4) to include passenger
automobiles and any other property used as a means of transportation) unless the
taxpayer complies with certain substantiation requirements. Section 274(d) further
provides that regulations may prescribe that some or all of the substantiation
requirements do not apply to an expense that does not exceed an amount prescribed by
the regulations.
.03 Section 1.274-5(j), in part, grants the Commissioner of Internal Revenue the
authority to establish a method under which a taxpayer may use mileage rates to
substantiate, for purposes of ' 274(d), the amount of the ordinary and necessary
expenses of using a vehicle for local transportation and transportation to, from, and at
the destination while traveling away from home.
.04 Section 1.274-5(g), in part, grants the Commissioner the authority to
prescribe rules relating to mileage allowances for ordinary and necessary expenses of
using a vehicle for local transportation and transportation to, from, and at the destination
while traveling away from home. Pursuant to this grant of authority, the Commissioner
may prescribe rules under which the allowances, if in accordance with reasonable
business practice, will be regarded as (1) equivalent to substantiation, by adequate
records or other sufficient evidence, of the amount of the travel and transportation
expenses for purposes of ' 1.274-5(c), and (2) satisfying the requirements of an
adequate accounting to the employer of the amount of the expenses for purposes of
' 1.274-5(f).
.05 Section 62(a)(2)(A) allows an employee, in determining adjusted gross
income, a deduction for the expenses allowed by Part VI (' 161 and following),
subchapter B, chapter 1 of the Code, paid or incurred by the employee in connection
with the performance of services as an employee under a reimbursement or other
expense allowance arrangement with a payor.
.06 Section 62(c) provides that an arrangement will not be treated as a
reimbursement or other expense allowance arrangement for purposes of ' 62(a)(2)(A) if
it--
(1) does not require the employee to substantiate the expenses covered
by the arrangement to the payor, or
(2) provides the employee with the right to retain any amount in excess of
the substantiated expenses covered under the arrangement.
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Section 62(c) further provides that the substantiation requirements described therein do
not apply to any expense to the extent that, under the grant of regulatory authority
prescribed in ' 274(d), the Commissioner has provided that substantiation is not
required for the expense.
.07 Under ' 1.62-2(c)(1), a reimbursement or other expense allowance
arrangement satisfies the requirements of ' 62(c) if it meets the requirements of
business connection, substantiation, and returning amounts in excess of expenses as
specified in the regulations. Section 1.62-2(e)(2) specifically provides that
substantiation of certain business expenses in accordance with rules prescribed under
the authority of ' 1.274-5(g) will be treated as substantiation of the amount of the
expenses for purposes of ' 1.62-2. Under ' 1.62-2(f)(2), the Commissioner may
prescribe rules under which an arrangement providing mileage allowances will be
treated as satisfying the requirement of returning amounts in excess of expenses, even
though the arrangement does not require the employee to return the portion of the
allowance that relates to miles of travel substantiated and that exceeds the amount of
the employee's expenses deemed substantiated pursuant to rules prescribed under
' 274(d), provided the allowance is reasonably calculated not to exceed the amount of
the employee's expenses or anticipated expenses and the employee is required to
return any portion of the allowance that relates to miles of travel not substantiated.
.08 Section 1.62-2(h)(2)(i)(B) provides that if a payor pays a mileage allowance
under an arrangement that meets the requirements of ' 1.62-2(c)(1), the portion, if any,
of the allowance that relates to miles of travel substantiated in accordance with
' 1.62-2(e), that exceeds the amount of the employee's expenses deemed
substantiated for the travel pursuant to rules prescribed under ' 274(d) and
' 1.274-5(g), and that the employee is not required to return, is subject to withholding
and payment of employment taxes. See '' 31.3121(a)-3, 31.3231(e)-1(a)(5),
31.3306(b)-2, and 31.3401(a)-4 of the Employment Tax Regulations. Because the
employee is not required to return this excess portion, the reasonable period of time
provisions of ' 1.62-2(g) (relating to the return of excess amounts) do not apply to this
excess portion.
.09 Under ' 1.62-2(h)(2)(i)(B)(4), the Commissioner may, in his or her discretion,
prescribe special rules regarding the timing of withholding and payment of employment
taxes on mileage allowances.
.10 Section 5.06(1) of this revenue procedure revises the limitation on
simultaneous use of multiple automobiles to allow a taxpayer using up to four vehicles
simultaneously to use the standard mileage rate.

SECTION 4. DEFINITIONS
.01 Standard mileage rate. The term "standard mileage rate" means the
applicable amount provided by the Service for optional use by employees or
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self-employed individuals in computing the deductible costs of operating automobiles
(including vans, pickups, or panel trucks) they own or lease for business purposes, or
by taxpayers in computing the deductible costs of operating automobiles for charitable,
medical, or moving expense purposes.
.02 Transportation expenses. The term "transportation expenses" means the
expenses of operating an automobile for local travel or transportation away from home.
.03 Mileage allowance. The term "mileage allowance" means a payment under a
reimbursement or other expense allowance arrangement that meets the requirements
specified in ' 1.62-2(c)(1) and that is:
(1) paid with respect to the ordinary and necessary business expenses
incurred, or that the payor reasonably anticipates will be incurred, by an employee for
transportation expenses in connection with the performance of services as an employee
of the employer,
(2) reasonably calculated not to exceed the amount of the expenses or the
anticipated expenses, and
(3) paid at the applicable standard mileage rate, a flat rate or stated
schedule, or in accordance with any other Service-specified rate or schedule.
.04 Flat rate or stated schedule. A mileage allowance is paid at a flat rate or
stated schedule if it is provided on a uniform and objective basis with respect to the
expenses described in section 4.03 of this revenue procedure. The allowance may be
paid periodically at a fixed rate, at a cents-per-mile rate, at a variable rate based on a
stated schedule, at a rate that combines any of these rates, or on any other basis that is
consistently applied and in accordance with reasonable business practice. Thus, for
example, a periodic payment at a fixed rate to cover the fixed costs (including
depreciation (or lease payments), insurance, registration and license fees, and personal
property taxes) of driving an automobile in connection with the performance of services
as an employee of the employer, coupled with a periodic payment at a cents-per-mile
rate to cover the operating costs (including gasoline and all taxes thereon, oil, tires, and
routine maintenance and repairs) of using an automobile for those purposes, is an
allowance paid at a flat rate or stated schedule. Likewise, a periodic payment at a
variable rate based on a stated schedule for different locales to cover the costs of
driving an automobile in connection with the performance of services as an employee is
an allowance paid at a flat rate or stated schedule.

SECTION 5. BUSINESS STANDARD MILEAGE RATE
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.01 In general. The standard mileage rate for transportation expenses is 40.5
cents per mile for all miles of use for business purposes. The Service will adjust the
business standard mileage rate (to the extent warranted) annually and prospectively.
.02 Use of the business standard mileage rate. A taxpayer may use the business
standard mileage rate with respect to an automobile that is either owned or leased by
the taxpayer. A taxpayer generally may deduct an amount equal to either the business
standard mileage rate times the number of business miles traveled or the actual costs
(both operating and fixed) paid or incurred by the taxpayer that are allocable to traveling
those business miles.
.03 Business standard mileage rate in lieu of operating and fixed costs. A
deduction using the standard mileage rate for business miles is computed on a yearly
basis and is in lieu of all operating and fixed costs of the automobile allocable to
business purposes (except as provided in section 9.06 of this revenue procedure).
Items such as depreciation (or lease payments), maintenance and repairs, tires,
gasoline (including all taxes thereon), oil, insurance, and license and registration fees
are included in operating and fixed costs for this purpose.
.04 Parking fees, tolls, interest, and taxes. Parking fees and tolls attributable to
use of the automobile for business purposes may be deducted as separate items.
Likewise, interest relating to the purchase of the automobile as well as state and local
personal property taxes may be deducted as separate items, but only to the extent
allowable under ' 163 or § 164, respectively. Section 163(h)(2)(A) expressly provides
that interest is nondeductible personal interest if it is paid or accrued on indebtedness
properly allocable to the trade or business of performing services as an employee.
Section 164 expressly provides that state and local taxes that are paid or accrued by a
taxpayer in connection with an acquisition or disposition of property will be treated as
part of the cost of the acquired property or as a reduction in the amount realized on the
disposition of the property. If the automobile is operated less than 100 percent for
business purposes, an allocation is required to determine the business and nonbusiness
portion of the taxes and interest deduction allowable.
.05 Depreciation. For owned automobiles placed in service for business
purposes, and for which the business standard mileage rate has been used for any
year, depreciation will be considered to have been allowed at the rate of 15 cents per
mile for 2001 and 2002, 16 cents per mile for 2003 and 2004, and 17 cents per mile for
2005, for those years in which the business standard mileage rate was used. If actual
costs were used for one or more of those years, the rates above will not apply to any
year in which the costs were used. The depreciation described above will reduce the
basis of the automobile (but not below zero) in determining adjusted basis as required
by ' 1016.
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.06 Limitations.
(1) The business standard mileage rate may not be used to compute the
deductible expenses of (a) automobiles used for hire, such as taxicabs, or (b) five or
more automobiles owned or leased by a taxpayer and used simultaneously (such as in
fleet operations).
(2) The business standard mileage rate may not be used to compute the
deductible business expenses of an automobile leased by a taxpayer unless the
taxpayer uses either the business standard mileage rate or a FAVR allowance (as
provided in section 8 of this revenue procedure) to compute the deductible business
expenses of the automobile for the entire lease period (including renewals). For a lease
commencing on or before December 31, 1997, the "entire lease period" means the
portion of the lease period (including renewals) remaining after that date.
(3) The business standard mileage rate may not be used to compute the
deductible expenses of an automobile for which the taxpayer has (a) claimed
depreciation using a method other than straight-line for its estimated useful life, (b)
claimed a ' 179 deduction, or (c) used the Accelerated Cost Recovery System under
former ' 168 or the Modified Accelerated Cost Recovery System (MACRS) under
current ' 168. By using the business standard mileage rate, the taxpayer has elected
to exclude the automobile (if owned) from MACRS pursuant to ' 168(f)(1). If, after
using the business standard mileage rate, the taxpayer uses actual costs, the taxpayer
must use straight-line depreciation for the automobile's remaining estimated useful life
(subject to the applicable depreciation deduction limitations under ' 280F).
(4) The business standard mileage rate and this revenue procedure may
not be used to compute the amount of the deductible automobile expenses of an
employee of the United States Postal Service incurred in performing services involving
the collection and delivery of mail on a rural route if the employee receives qualified
reimbursements (as defined in ' 162(o)) for the expenses. See ' 162(o) for the rules
that apply to these qualified reimbursements.

SECTION 6. RESERVED

SECTION 7. CHARITABLE, MEDICAL, AND MOVING STANDARD MILEAGE RATE
.01 Charitable. Section 170(i) provides a standard mileage rate of 14 cents per
mile for purposes of computing the charitable deduction for use of an automobile in
connection with rendering gratuitous services to a charitable organization under ' 170.
.02 Medical and moving. The standard mileage rate is 15 cents per mile for use
of an automobile (a) to obtain medical care described in § 213, or (b) as part of a move
for which the expenses are deductible under § 217. The Service will adjust the medical
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and moving expense standard mileage rates (to the extent warranted) annually and
prospectively.
.03 Charitable, medical, or moving expense standard mileage rate in lieu of
operating expenses. A deduction computed using the applicable standard mileage rate
for charitable, medical, or moving expense miles is in lieu of all operating expenses
(including gasoline and oil) of the automobile allocable to those purposes. Costs for
items such as depreciation (or lease payments), insurance, and license and registration
fees are not deductible, and are not included in the standard mileage rates.
.04 Parking fees, tolls, interest, and taxes. Parking fees and tolls attributable to
the use of the automobile for charitable, medical, or moving expense purposes may be
deducted as separate items. Interest relating to the purchase of the automobile and
state and local personal property taxes are not deductible as charitable, medical, or
moving expenses, but they may be deducted as separate items to the extent allowable
under ' 163 or § 164, respectively.

SECTION 8. FIXED AND VARIABLE RATE ALLOWANCE
.01 In general.
(1) The ordinary and necessary expenses paid or incurred by an
employee in driving an automobile owned or leased by the employee in connection with
the performance of services as an employee of the employer will be deemed
substantiated (in an amount determined under section 9 of this revenue procedure)
when a payor reimburses those expenses with a mileage allowance using a flat rate or
stated schedule that combines periodic fixed and variable rate payments that meet all
the requirements of section 8 of this revenue procedure (a FAVR allowance).
(2) The amount of a FAVR allowance must be based on data that (a) is
derived from the base locality, (b) reflects retail prices paid by consumers, and (c) is
reasonable and statistically defensible in approximating the actual expenses employees
receiving the allowance would incur as owners of the standard automobile.
.02 Definitions.
(1) FAVR allowance. A FAVR allowance includes periodic fixed payments
and periodic variable payments. A payor may maintain more than one FAVR
allowance. A FAVR allowance that uses the same payor, standard automobile (or an
automobile of the same make and model that is comparably equipped), retention period,
and business use percentage is considered one FAVR allowance, even though other
features of the allowance may vary. A FAVR allowance also includes any optional high
mileage payments; however, optional high mileage payments are included in the
employee's gross income, are reported as wages or other compensation on the
employee's Form W-2, and are subject to withholding and payment of employment
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taxes when paid. See section 9.05 of this revenue procedure. An optional high mileage
payment covers the additional depreciation for a standard automobile attributable to
business miles driven and substantiated by the employee for a calendar year in excess
of the annual business mileage for that year. If an employee is covered by the FAVR
allowance for less than the entire calendar year, the annual business mileage may be
prorated on a monthly basis for purposes of the preceding sentence.
(2) Periodic fixed payment. A periodic fixed payment covers the projected
fixed costs (including depreciation (or lease payments), insurance, registration and
license fees, and personal property taxes) of driving the standard automobile in
connection with the performance of services as an employee of the employer in a base
locality, and must be paid at least quarterly. A periodic fixed payment may be computed
by (a) dividing the total projected fixed costs of the standard automobile for all years of
the retention period, determined at the beginning of the retention period, by the number
of periodic fixed payments in the retention period, and (b) multiplying the resulting
amount by the business use percentage.
(3) Periodic variable payment. A periodic variable payment covers the
projected operating costs (including gasoline and all taxes thereon, oil, tires, and routine
maintenance and repairs) of driving a standard automobile in connection with the
performance of services as an employee of the employer in a base locality, and must be
paid at least quarterly. The rate of a periodic variable payment for a computation period
may be computed by dividing the total projected operating costs for the standard
automobile for the computation period, determined at the beginning of the computation
period, by the computation period mileage. A computation period can be any period of
a year or less. Computation period mileage is the total mileage (business and personal)
a payor reasonably projects a standard automobile will be driven during a computation
period and equals the retention mileage divided by the number of computation periods
in the retention period. For each business mile substantiated by the employee for the
computation period, the periodic variable payment must be paid at a rate that does not
exceed the rate for that computation period.
(4) Base locality. A base locality is the particular geographic locality or
region of the United States in which the costs of driving an automobile in connection
with the performance of services as an employee of the employer are generally paid or
incurred by the employee. Thus, for purposes of determining the amount of fixed costs,
the base locality is generally the geographic locality or region in which the employee
resides. For purposes of determining the amount of operating costs, the base locality is
generally the geographic locality or region in which the employee drives the automobile
in connection with the performance of services as an employee of the employer.
(5) Standard automobile. A standard automobile is the automobile
selected by the payor on which a specific FAVR allowance is based.
(6) Standard automobile cost. The standard automobile cost for a
calendar year may not exceed 95 percent of the sum of (a) the retail dealer invoice cost
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of the standard automobile in the base locality, and (b) state and local sales or use
taxes applicable on the purchase of the automobile. Further, the standard automobile
cost may not exceed $27,600.
(7) Annual mileage. Annual mileage is the total mileage (business and
personal) a payor reasonably projects a standard automobile will be driven during a
calendar year. Annual mileage equals the annual business mileage divided by the
business use percentage.
(8) Annual business mileage. Annual business mileage is the mileage a
payor reasonably projects a standard automobile will be driven by an employee in
connection with the performance of services as an employee of the employer during the
calendar year, but may not be less than 6,250 miles for a calendar year. Annual
business mileage equals the annual mileage multiplied by the business use percentage.
(9) Business use percentage. A business use percentage is determined
by dividing the annual business mileage by the annual mileage. The business use
percentage may not exceed 75 percent. In lieu of demonstrating the reasonableness of
the business use percentage based on records of total mileage and business mileage
driven by the employees annually, a payor may use a business use percentage that is
less than or equal to the following percentages for a FAVR allowance that is paid for the
following annual business mileage:
Annual business mileage Business use percentage
6,250 or more but less than 10,000 45 percent
10,000 or more but less than 15,000 55 percent
15,000 or more but less than 20,000 65 percent
20,000 or more 75 percent
(10) Retention period. A retention period is the period in calendar years
selected by the payor during which the payor expects an employee to drive a standard
automobile in connection with the performance of services as an employee of the
employer before the automobile is replaced. The period may not be less than two
calendar years.
(11) Retention mileage. Retention mileage is the annual mileage
multiplied by the number of calendar years in the retention period.
(12) Residual value. The residual value of a standard automobile is the
projected amount for which it could be sold at the end of the retention period after being
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driven the retention mileage. The Service will accept the following safe harbor residual
values for a standard automobile computed as a percentage of the standard automobile
cost:
Retention period Residual value
2-year 70 percent
3-year 60 percent
4-year 50 percent
.03 FAVR allowance in lieu of operating and fixed costs.
(1) A reimbursement computed using a FAVR allowance is in lieu of the
employee's deduction of all the operating and fixed costs paid or incurred by an
employee in driving the automobile in connection with the performance of services as
an employee of the employer, except as provided in section 9.06 of this revenue
procedure. Items such as depreciation (or lease payments), maintenance and repairs,
tires, gasoline (including all taxes thereon), oil, insurance, license and registration fees,
and personal property taxes are included in operating and fixed costs for this purpose.
(2) Parking fees and tolls attributable to an employee driving the standard
automobile in connection with the performance of services as an employee of the
employer are not included in fixed and operating costs and may be deducted as
separate items. Similarly, interest relating to the purchase of the standard automobile
may be deducted as a separate item, but only to the extent that the interest is an
allowable deduction under ' 163.
.04 Depreciation.
(1) A FAVR allowance may not be paid with respect to an automobile for
which the employee has (a) claimed depreciation using a method other than
straight-line for its estimated useful life, (b) claimed a ' 179 deduction, or (c) used the
Accelerated Cost Recovery System under former ' 168 or the Modified Accelerated
Cost Recovery System under current ' 168. If an employee uses actual costs for an
owned automobile that has been covered by a FAVR allowance, the employee must
use straight-line depreciation for the automobile's remaining estimated useful life
(subject to the applicable depreciation deduction limitations under ' 280F).
(2) Except as provided in section 8.04(3) of this revenue procedure, the
total amount of the depreciation component for the retention period taken into account
in computing the periodic fixed payments for that retention period may not exceed the
excess of the standard automobile cost over the residual value of the standard
automobile. In addition, the total amount of the depreciation component may not
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exceed the sum of the annual ' 280F limitations on depreciation (in effect at the
beginning of the retention period) that apply to the standard automobile during the
retention period.
(3) If the depreciation component of periodic fixed payments exceeds the
limitations in section 8.04(2) of this revenue procedure, that section will be treated as
satisfied in any year during which the total annual amount of the periodic fixed
payments and the periodic variable payments made to an employee driving 80 percent
of the annual business mileage of the standard automobile does not exceed the amount
obtained by multiplying 80 percent of the annual business mileage of the standard
automobile by the applicable business standard mileage rate for that year (under
section 5.01 of the applicable revenue procedure).
(4) The depreciation included in each periodic fixed payment portion of a
FAVR allowance paid with respect to an automobile will reduce the basis of the
automobile (but not below zero) in determining adjusted basis as required by ' 1016.
See section 8.07(2) of this revenue procedure for the requirement that the employer
report the depreciation component of a periodic fixed payment to the employee.
.05 FAVR allowance limitations.
(1) A FAVR allowance may be paid only to an employee who
substantiates to the payor for a calendar year at least 5,000 miles driven in connection
with the performance of services as an employee of the employer or, if greater, 80
percent of the annual business mileage of that FAVR allowance. If the employee is
covered by the FAVR allowance for less than the entire calendar year, these limits may
be prorated on a monthly basis.
(2) A FAVR allowance may not be paid to a control employee (as defined
in ' 1.61-21(f)(5) and (6), excluding the $100,000 limitation in paragraph (f)(5)(iii)).
(3) An employer may not pay a FAVR allowance if at any time during a
calendar year a majority of the employees covered by the FAVR allowance are
management employees.
(4) An employer may not pay a FAVR allowance unless at all times during
a calendar year at least five employees of the employer are covered by one or more
FAVR allowances.
(5) A FAVR allowance may be paid only with respect to an automobile (a)
owned or leased by the employee receiving the payment, (b) the cost of which, when
new, is at least 90 percent of the standard automobile cost taken into account for
purposes of determining the FAVR allowance for the first calendar year the employee
receives the allowance with respect to that automobile, and (c) the model year of which
does not differ from the current calendar year by more than the number of years in the
retention period.
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(6) A FAVR allowance may not be paid with respect to an automobile
leased by an employee for which the employee has used actual expenses to compute
the deductible business expenses of the automobile for any year during the entire lease
period. For a lease commencing on or before December 31, 1997, the "entire lease
period" means the portion of the lease period (including renewals) remaining after that
date.
(7) The insurance cost component of a FAVR allowance must be based
on the rates charged in the base locality for insurance coverage on the standard
automobile during the current calendar year without taking into account rate-increasing
factors such as poor driving records or young drivers.
(8) A FAVR allowance may be paid only to an employee whose insurance
coverage limits on the automobile with respect to which the FAVR allowance is paid are
at least equal to the insurance coverage limits used to compute the periodic fixed
payment under that FAVR allowance.
.06 Employee reporting. Within 30 days after an employee's automobile is
initially covered by a FAVR allowance, or is again covered by a FAVR allowance if
coverage has lapsed, the employee by written declaration must provide the payor with
the following information: (a) the make, model, and year of the employee's automobile,
(b) written proof of the insurance coverage limits on the automobile, (c) the odometer
reading of the automobile, (d) if owned, the purchase price of the automobile or, if
leased, the price at which the automobile is ordinarily sold by retailers (the gross
capitalized cost of the automobile), and (e) if owned, whether the employee has claimed
depreciation with respect to the automobile using any of the depreciation methods
prohibited by section 8.04(1) of this revenue procedure or, if leased, whether the
employee has computed deductible business expenses with respect to the automobile
using actual expenses. The information described in (a), (b), and (c) of the preceding
sentence also must be supplied by the employee to the payor within 30 days after the
beginning of each calendar year that the employee's automobile is covered by a FAVR
allowance.
.07 Payor recordkeeping and reporting.
(1) The payor or its agent must maintain written records setting forth (a)
the statistical data and projections on which the FAVR allowance payments are based,
and (b) the information provided by the employees pursuant to section 8.06 of this
revenue procedure.
(2) Within 30 days of the end of each calendar year, the employer must
provide each employee covered by a FAVR allowance during that year with a statement
that, for automobile owners, lists the amount of depreciation included in each periodic
fixed payment portion of the FAVR allowance paid during that calendar year and
explains that by receiving a FAVR allowance the employee has elected to exclude the
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automobile from the Modified Accelerated Cost Recovery System pursuant to
' 168(f)(1). For automobile lessees, the statement must explain that by receiving the
FAVR allowance the employee may not compute the deductible business expenses of
the automobile using actual expenses for the entire lease period (including renewals).
For a lease commencing on or before December 31, 1997, the "entire lease period"
means the portion of the lease period (including renewals) remaining after that date.
.08 Failure to meet section 8 requirements. If an employee receives a mileage
allowance that fails to meet one or more of the requirements of section 8 of this revenue
procedure, the employee may not be treated as covered by any FAVR allowance of the
payor during the period of the failure. Nevertheless, the expenses to which that mileage
allowance relates may be deemed substantiated using the method described in sections
5, 9.01(1), and 9.02 of this revenue procedure to the extent the requirements of those
sections are met.

SECTION 9. APPLICATION
.01 If a payor pays a mileage allowance in lieu of reimbursing actual
transportation expenses incurred or to be incurred by an employee, the amount of the
expenses that is deemed substantiated to the payor is either:
(1) for any mileage allowance other than a FAVR allowance, the lesser of
the amount paid under the mileage allowance or the applicable standard mileage rate in
section 5.01 of this revenue procedure multiplied by the number of business miles
substantiated by the employee; or
(2) for a FAVR allowance, the amount paid under the FAVR allowance
less the sum of (a) any periodic variable rate payment that relates to miles in excess of
the business miles substantiated by the employee and that the employee fails to return
to the payor although required to do so, (b) any portion of a periodic fixed payment that
relates to a period during which the employee is treated as not covered by the FAVR
allowance and that the employee fails to return to the payor although required to do so,
and (c) any optional high mileage payments.
.02 If the amount of transportation expenses is deemed substantiated under the
rules provided in section 9.01 of this revenue procedure, and the employee actually
substantiates to the payor the elements of time, place (or use), and business purpose of
the transportation expenses in accordance with paragraphs (b)(2) (travel away from
home) and (b)(6) (listed property, which includes passenger automobiles and any other
property used as a means of transportation) of ' 1.274-5T, and paragraph (c) of
' 1.274-5, the employee is deemed to satisfy the adequate accounting requirements of
' 1.274-5(f) as well as the requirement to substantiate by adequate records or other
sufficient evidence for purposes of ' 1.274-5(c). See ' 1.62-2(e)(1) for the rule that an
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arrangement must require business expenses to be substantiated to the payor within a
reasonable period of time.
.03 An arrangement providing mileage allowances will be treated as satisfying
the requirement of ' 1.62-2(f)(2) with respect to returning amounts in excess of
expenses as follows:
(1) For a mileage allowance other than a FAVR allowance, the
requirement to return excess amounts will be treated as satisfied if the employee is
required to return within a reasonable period of time (as defined in ' 1.62-2(g)) any
portion of the allowance that relates to miles of travel not substantiated by the
employee, even though the arrangement does not require the employee to return the
portion of the allowance that relates to the miles of travel substantiated and that
exceeds the amount of the employee's expenses deemed substantiated. For example,
assume a payor provides an employee an advance mileage allowance of $90 based on
an anticipated 200 business miles at 45 cents per mile (at a time when the applicable
business standard mileage rate is 40.5 cents per mile), and the employee substantiates
120 business miles. The requirement to return excess amounts will be treated as
satisfied if the employee is required to return the portion of the allowance that relates to
the 80 unsubstantiated business miles ($36) even though the employee is not required
to return the portion of the allowance ($5.40) that exceeds the amount of the employee's
expenses deemed substantiated under section 9.01 of this revenue procedure ($48.60)
for the 120 substantiated business miles. However, the $5.40 excess portion of the
allowance is treated as paid under a nonaccountable plan as discussed in section 9.05.
(2) For a FAVR allowance, the requirement to return excess amounts will
be treated as satisfied if the employee is required to return within a reasonable period of
time (as defined in ' 1.62-2(g)), (a) the portion (if any) of the periodic variable payment
received that relates to miles in excess of the business miles substantiated by the
employee, and (b) the portion (if any) of a periodic fixed payment that relates to a period
during which the employee was not covered by the FAVR allowance.
.04 An employee is not required to include in gross income the portion of a
mileage allowance received from a payor that is less than or equal to the amount
deemed substantiated under section 9.01 of this revenue procedure, provided the
employee substantiates in accordance with section 9.02. See ' 1.274-5T(f)(2)(i). In
addition, that portion of the allowance is treated as paid under an accountable plan, is
not reported as wages or other compensation on the employee's Form W-2, and is
exempt from withholding and payment of employment taxes. See '' 1.62-2(c)(2) and
(c)(4).
.05 An employee is required to include in gross income only the portion of a
mileage allowance received from a payor that exceeds the amount deemed
substantiated under section 9.01 of this revenue procedure, provided the employee
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substantiates in accordance with section 9.02 of this revenue procedure. See
' 1.274-5T(f)(2)(ii). In addition, the excess portion of the allowance is treated as paid
under a nonaccountable plan, is reported as wages or other compensation on the
employee's Form W-2, and is subject to withholding and payment of employment taxes.
See '' 1.62-2(c)(3)(ii), (c)(5), and (h)(2)(i)(B).
.06 If an employee’s substantiated expenses are less than the employee's actual
expenses, the following rules apply:
(1) Except as otherwise provided in section 9.06(2) of this revenue
procedure with respect to leased automobiles, if the amount of the expenses deemed
substantiated under the rules provided in section 9.01 of this revenue procedure is less
than the amount of the employee's business transportation expenses, the employee
may claim an itemized deduction for the amount by which the business transportation
expenses exceed the amount that is deemed substantiated, provided the employee
substantiates all the business transportation expenses, includes on Form 2106,
Employee Business Expenses, the deemed substantiated portion of the mileage
allowance received from the payor, and includes in gross income the portion (if any) of
the mileage allowance received from the payor that exceeds the amount deemed
substantiated. See ' 1.274-5T(f)(2)(iii). However, for purposes of claiming this
itemized deduction, substantiation of the amount of the expenses is not required if the
employee is claiming a deduction that is equal to or less than the applicable standard
mileage rate multiplied by the number of business miles substantiated by the employee
minus the amount deemed substantiated under section 9.01 of this revenue procedure.
The itemized deduction is subject to the 2-percent floor on miscellaneous itemized
deductions provided in ' 67.
(2) An employee whose business transportation expenses with respect to
a leased automobile are deemed substantiated under section 9.01(1) of this revenue
procedure (relating to an allowance other than a FAVR allowance) may not claim a
deduction based on actual expenses under section 9.06(1) unless the employee does
so consistently beginning with the first business use of the automobile after December
31, 1997. However, an employee whose business transportation expenses with respect
to a leased automobile are deemed substantiated under section 9.01(2) of this revenue
procedure (relating to a FAVR allowance) may not claim a deduction based on actual
expenses.
.07 An employee may deduct an amount computed pursuant to section 5.01 of
this revenue procedure only as an itemized deduction. This itemized deduction is
subject to the 2-percent floor on miscellaneous itemized deductions provided in ' 67.
.08 A self-employed individual may deduct an amount computed pursuant to
section 5.01 of this revenue procedure in determining adjusted gross income under
' 62(a)(1).
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.09 If a payor's reimbursement or other expense allowance arrangement
evidences a pattern of abuse of the rules of ' 62(c) and the regulations thereunder, all
payments under the arrangement will be treated as made under a nonaccountable plan.
Thus, the payments are included in the employee's gross income, are reported as
wages or other compensation on the employee's Form W-2, and are subject to
withholding and payment of employment taxes. See '' 1.62-2(c)(3), (c)(5), and (h)(2).

SECTION 10. WITHHOLDING AND PAYMENT OF EMPLOYMENT TAXES
.01 The portion of a mileage allowance (other than a FAVR allowance), if any,
that relates to the miles of business travel substantiated and that exceeds the amount
deemed substantiated for those miles under section 9.01(1) of this revenue procedure is
subject to withholding and payment of employment taxes. See ' 1.62-2(h)(2)(i)(B).
(1) In the case of a mileage allowance paid as a reimbursement, the
excess described in section 10.01 of this revenue procedure is subject to withholding
and payment of employment taxes in the payroll period in which the payor reimburses
the expenses for the business miles substantiated. See ' 1.62-2(h)(2)(i)(B)(2).
(2) In the case of a mileage allowance paid as an advance, the excess
described in section 10.01 of this revenue procedure is subject to withholding and
payment of employment taxes no later than the first payroll period following the payroll
period in which the business miles with respect to which the advance was paid are
substantiated. See ' 1.62-2(h)(2)(i)(B)(3). If some or all of the business miles with
respect to which the advance was paid are not substantiated within a reasonable period
of time and the employee does not return the portion of the allowance that relates to
those miles within a reasonable period of time, the portion of the allowance that relates
to those miles is subject to withholding and payment of employment taxes no later than
the first payroll period following the end of the reasonable period. See ' 1.62-
2(h)(2)(i)(A).
(3) In the case of a mileage allowance that is not computed on the basis of
a fixed amount per mile of travel (for example, a mileage allowance that combines
periodic fixed and variable rate payments, but that does not satisfy the requirements of
section 8 of this revenue procedure), the payor must compute periodically (no less
frequently than quarterly) the amount, if any, that exceeds the amount deemed
substantiated under section 9.01(1) of this revenue procedure by comparing the total
mileage allowance paid for the period to the applicable standard mileage rate in section
5.01 of this revenue procedure multiplied by the number of business miles substantiated
by the employee for the period. Any excess is subject to withholding and payment of
employment taxes no later than the first payroll period following the payroll period in
which the excess is computed. See ' 1.62-2(h)(2)(i)(B)(4).
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(4) For example, assume an employer pays its employees a mileage
allowance at a rate of 45 cents per mile (when the business standard mileage rate is
40.5 cents per mile). The employer does not require the return of the portion of the
allowance that exceeds the business standard mileage rate for the business miles
substantiated (4.5 cents). In June, the employer advances an employee $225 for 500
miles to be traveled during the month. In July, the employee substantiates to the
employer 400 business miles traveled in June and returns $45 to the employer for the
100 business miles not traveled. The amount deemed substantiated for the 400 miles
traveled is $162 and the employee is not required to return $18. No later than the first
payroll period following the payroll period in which the 400 business miles traveled are
substantiated, the employer must withhold and pay employment taxes on $18.
.02 The portion of a FAVR allowance, if any, that exceeds the amount deemed
substantiated for those miles under section 9.01(2) of this revenue procedure is subject
to withholding and payment of employment taxes. See ' 1.62-2(h)(2)(i)(B).
(1) Any periodic variable rate payment that relates to miles in excess of
the business miles substantiated by the employee and that the employee fails to return
within a reasonable period, or any portion of a periodic fixed payment that relates to a
period during which the employee is treated as not covered by the FAVR allowance and
that the employee fails to return within a reasonable period, is subject to withholding
and payment of employment taxes no later than the first payroll period following the end
of the reasonable period. See ' 1.62-2(h)(2)(i)(A).
(2) Any optional high mileage payment is subject to withholding and
payment of employment taxes when paid.

SECTION 11. EFFECT ON OTHER DOCUMENTS
Rev. Proc. 2003-76, 2003-43 I.R.B. 924, is superseded for mileage allowances
that are paid both (1) to an employee on or after January 1, 2005, and (2) with respect
to transportation expenses paid or incurred by the employee on or after January 1,
2005. Rev. Proc. 2003-76 is also superseded for purposes of computing the amount
allowable as a deduction for transportation expenses paid or incurred on or after
January 1, 2005.

DRAFTING INFORMATION
The principal author of this revenue procedure is John Roman Faron of the Office
of Associate Chief Counsel (Income Tax and Accounting). For further information
regarding this revenue procedure, contact Mr. Faron at (202) 622-4930 (not a toll-free
call).